The Asian diaspora bond market potential is large and remittances could be used to fund investment projects focusing on development objectives, explains Eric Guichard, Chief Executive Officer of Homestrings Ltd.
Title: Diaspora Bonds and Remittances for Development
Description: The Asian diaspora bond market potential is large and remittances could be used to fund investment projects focusing on development objectives, explains Eric Guichard, Chief Executive Officer of Homestrings Ltd.
Chief Executive Officer
Q: How big is the diaspora bond market?
A: The size of the diaspora bond market is a little difficult to grasp because you have to take into account all the issueances that’s why we are defining it. In that case you have to look at Israel as the biggest issuer of diaspora bonds, the Israel Bond Agency being the biggest one. But when we are equating it, is to look at the total savings of diaspora is the percentage of remittances, let’s say about 20% of the remittances is equal to the savings and therefore that would be the potential market of diaspora bonds.
Asian countries, in terms of issuances, has been pretty patchy. Primarily because, I guess we’ll give to you the more detailed reasons, the marketing efforts on the part of the agencies who issue hasn’t been extensive. But the size on average is between 25-50 million per country. I think on the record we have may be like 3 countries in Asia who have had issuances. The Philippines stands out in terms of their proceeds in capturing remittances outside of bond issuances, particularly as we saw this morning with the issuance of deposit accounts by private banks sanctioned by the Central Bank, a difference charging capturing remittances that’s from savings and remittances.
Q: What has been the experience of countries that have introduced diaspora bonds?
A: You have to distinguished between 2 groups: sentimental issuances that are related to a particular event and then you have another group where you have smaller attempts at diaspora bond that were not successful, so I’ll talk about those two. In terms of benchmark, you basically have 2 countries that have been very successful in issuing diaspora bonds per se. One of them is Israel as I’ve mentioned before. Starting way in the 50s when they lost the country pulling on the sentimental strings of Jews living abroad wanting to see their homeland built, very successful. Built on that to create an agency, as I mentioned before, that regularly issues bonds link to a particular project. One project, which I actually saw myself was a tunnel between Jerusalem and Tel Aviv completely financed by Israel bonds issued to Jews around the world. Both institutions where they target chief investment officers who were of the Jewish faith they could allocate portions of assets under their authority and also religious groups and other Jewish organizations. Very very powerful example of a marketing machine in action to the successful placing of diaspora bonds, diaspora project bonds in particular.
The other example would be India. I believe it was during a crisis as I recall in which they appealed to the Indian diaspora because they were in a situation of international sanctions and the response was punctual and unique subsequent attempts after that hadn’t been as successful either because of local persuasion or other extremist factor.
In the other bucket where you have less success in terms of issuances, I believe Nepal is one example. But what is characteristic in the second bucket is undersubscription, either the goal is very ambitious in terms of trying to tap into diaspora or the efforts in placing the bonds haven’t been well thought out. So, distribution channels, marketing budgets, outreach hasn’t been intensed or sustained.
Q: What are the factors driving demand in the diaspora bond market?
A: I think if you set aside the outreach effort by government agencies seeking the interests of Asians living abroad and you simply look at the interest of the diaspora to invests in the home country that interest is very very strong, that’s uniform, that’s similar in Asia’s, similar in Latin America, similar in Africa. So, next question is: Is the diaspora bond the right instrument to tap into that desire to invest back home? And the question is yes but it’s yes for a particular type of investors. You take for example, the Filipino example where these foreign currency accounts cater to the blue collar worker, which is the majority of the Filipino diasporans living abroad whereas the diaspora bond itself as an instrument is very specific instrument for people who don’t have financial literacy and if the application of the bond becomes very restrictive so its either for people who have disposable income, who are looking at financial planning, who are looking at the use of extra money; even the denomination of the bonds a thousand dollars on average is very high for investors who are of the lower income bracket so from a targeting standpoint, diaspora bond does look at a very specific professional bracket if you will. Therefore as a result it is a special instrument.
Q: What determines the success of a diaspora bond placement?
A: You have to look for about 3 or 4 success key factors. The first is, it is targeted at a project where there is unanimous belief of impact, for example the tram tunnel linking Tel Aviv to Jerusalem. You know facilitation of transports, mobility, everybody agrees that’s an important need. The placement of that bond was probably very very easy. I think it was a 1.5 billion dollars project. So that’s no. 1, tying the bond to a particular project the people all agree on – infrastructure, low income housing, power. Those kinds of economic factors are very important. The second one is outreach, understanding which channels; first of all which target audience to go after professionals, blue collars; and then tying the instrument to those targets. So in case of diaspora bonds, targeting professionals would be the right way to go about. The third one is channels, for professionals it’s going through the banks, going through the dealers, going through pension savings. And last but not the least, this is the one factor that is least focus on, that’s sustained marketing. Just because you’re issuing the bond in three months does not mean you should begin to market two months before. You should be constantly marketing the needs for financing of development projects and constantly marketing the fact that you are using bonds to finance those projects and then also constantly marketing the story or the narrative around the project and also last but not the least focusing on investor education. How does the bond work? Why is it a good investment? What is the yield? What are the features of the bond? And then making sure that all the outlets, all the touch points are available, whether it’s a financial institution, whether it’s the agency, whether it’s the embassy. All touch points that are available for the investors should be there.
One of the key developments that we are seeing emerge is the use of development credits tied to diaspora bonds. One example would be the US government Agency for International Development providing a 50% guarantee on capital investors through diaspora bonds to provide financing to small and medium enterprises, to provide financing to sovereign such as municipalities. I think, we’ve seen two similar projects, one that were actually involved in linked to investing in small and medium enterprises in Eastern Europe in particular. And the second one with respect to municipality is where the US government has provided a 50% guarantee to the municipality of Dakar, Senegal to finance infrastructure within that municipality. I think those kind of incentives can be quite powerful because on one hand it’s credential, you saying, I’m investing in a bond, that’s a 5 year, 10 year bond that’s going to finance infrastructure in this particular municipality. But at the same time I understand that the full faith and credit of the US government or the development agency is behind my investment. So, I get a return, my capital is 50% guarantee, and I make an impact. It’s a triple bottom line in the sink of instruments, quite a profitable proposition.
Q: Why should investors consider diaspora bonds?
A: Two answers to that. One, from a financial credential standpoint. People who have disposable income, who can commit that income or that excess income to a long term investment should look at diaspora bonds. Secondly, people who really want to participate in transforming the home country should look at diaspora bond specifically diaspora bonds related to projects. And last but not least, if there are incentives around diaspora bonds for example whether there’s tax incentive and other kinds of incentive, that also should be taken into account.
Q: What is the impact of diaspora bonds on development?
A: Based on what we’ve seen, whether it’s Asia or it’s Africa, bonds related to infrastructure where people can assess the socio-economic impact of the financing that they’re making have had the most success because it’s the easiest story to tell. To tell somebody that this bond is going to finance a highway linking two cities, or it’s going to finance a commercial real estate building, or it’s going to finance a school system or going to finance a power plant. Those are examples that are very tangible and people are very very comfortable associating their hard earned dollars with an instrument that will make that kind of impact.